China to buy stake in equity firm

Blackstone founder says move 'historic'

May 21, 2007|By Andrew Ross Sorkin and David Barboza, New York Times News Service

The Chinese government said Sunday that it would acquire a $3 billion stake in the Blackstone Group, the private equity firm, in the country's first effort to diversify its $1.2 trillion in foreign-exchange reserves beyond U.S. Treasury bills and into commercial enterprise.

The deal, which is set to coincide with Blackstone's $4 billion initial public offering this year, will give China a roughly 8 percent stake in Blackstone, which owns companies that have 375,000 employees and $83 billion in annual sales.

It also would represent a watershed for the booming private equity industry as it tries to gain a foothold in China.

"It's a historic change. It's a paradigm shift in global capital flows," Stephen Schwarzman, a co-founder of Blackstone, said in an interview. He called the Chinese government's decision "huge" and "surprising."

China will invest in the Blackstone firm itself, not in its funds, which invest in companies. However, the relationship opens the door for China to invest in Blackstone's funds in the future.

China has been grappling with how to invest its foreign reserves more aggressively. In March, China said it would set up a special investment arm -- the State Foreign Exchange Investment Co. -- to handle a portion of those reserves, which are held by the central bank, in the hope of earning a higher return.

The agency is not yet operating, but the Blackstone deal suggests that the Chinese government is eager to put its vast reserves to work outside of China. Still, as Blackstone begins to invest in emerging markets like China, the deal offers the prospect that at least some of the money could find its way back to China. Indeed, Blackstone is planning to open offices in Hong Kong and Beijing this year.

For years, China has invested in foreign currency, particularly U.S. Treasury bonds, which have earned a safe but modest return. But now, with the U.S. dollar in decline, the Chinese government is willing to take on more risk to earn higher returns. The new agency is being modeled, in part, on Temasek Holdings, Singapore's state-owned investment firm, which has invested billions of dollars around the world, particularly in China.

A similar investment agency in China would effectively create the world's largest hedge fund. Some analysts say the China fund's investment of billions of dollars in the global financial markets could push global asset prices higher, affecting American and European stocks, bonds and interest rates, as well as the value of energy and natural resources in Africa and the Middle East.

The Blackstone Group, which is based in New York, has been moving aggressively in recent months to find investments in China. Blackstone is trying to catch up to the Carlyle Group, which has a large operation in China.

In January, Blackstone hired Anthony Leung, the former Hong Kong financial secretary, to run the group's business in China, Hong Kong and Taiwan. And last month, Reuters reported that Blackstone was seeking to acquire a stake in the Guofeng Group, one of China's largest makers of plastic products.

Under the terms of the Chinese government's investment in Blackstone, it will buy nonvoting shares as part of the firm's initial public offering at 95.5 percent of the public-offering price.

China may reduce its ownership after the public offering so that it would hold less than 10 percent of Blackstone's shares. The public offering is expected to value Blackstone at as much as $40 billion.

While the investment may presage further Chinese investment in private equity firms in the future, China has promised not to invest in a competing private equity firm for a year.

Blackstone, which has led multibillion-dollar buyouts of Equity Office Properties, Freescale Semiconductor and Michaels Stores, manages a $15.6 billion buyout fund, the second-largest in the industry. In its prospectus, it reported $2.3 billion in profit in 2006.